Bombay High Court
Babubhai M. Sanghvi vs Commissioner Of Income-Tax, Bombay ... on 25 March, 1973
Equivalent citations: [1974]97ITR213(BOM)
Author: V.D. Tulzapurkar
Bench: V.D. Tulzapurkar
JUDGMENT Tulzapurkar, J.
1. By this reference made to us by the Tribunal under section 66 (1) of the Indian Income-tax Act, 1922, at the instance of the assessees the following four questions have been referred for out determination :
"(1) Whether, on the facts and in the circumstances of the case, the first proviso to section 12B of the Indian Income-tax Act, 1922, property became applicable ? If the answer to the question No. 1 is in the affirmative -
(2) Whether, on the facts and in the circumstances of the case, the 'fair market value' of the shares was properly fixed taking into consideration the balance-sheet of the company as at October 31, 1959, or it was to be fixed on the basis of the balance-sheet of the company as at October 31, 1958 ?
(3) In any event, in fixing the 'fair market value' of the shares on the basis of either balance-sheet of the company, the proposed dividend was liable to be deducted ?
(4) In any event, whether on the facts and in the circumstances of the case, capital gains on the sale of shares could properly be computed taking 'the full value of the consideration' to be higher than Rs. 125 per share within the meaning of the substantive provisions of section 12B (2) of the Act?
2. The facts giving rise to this reference may be stated. Three assessees in the case are Babubhai M. Sanghvi, Ratilal M. Gandhi and Nagardas Ranchhoddas Sanghvi and the relevant assessment year is 1960-61, the accounting year being S. Y. 2015. All the three assessees are the partners in the firm called R. Ratilal & Co. Each of them has a son or sons as partners in the said firm. Thus, Babubhai M. Sanghvi has a son, Dhirajlal, as partner, Ratilal M. Gandhi has a son, Kirit, as partner and Nagardas R. Sanghvi has two sons, Arun and Gaurang, as partners. The assessees as well as the three sons mentioned above also held certain number of shares in a public company called Bhavnagar Vegetable Products Ltd. Each of the three assessees and their sons held certain blocks of ordinary and preference shares in this company. Besides being partners in the firm, R. Ratilal & Co., and being shareholders of Bhavnagar Vegetable Products Ltd. as above, Ratilal and Nagardas were also directors of the said company during the relevant accounting years; so also Babubhai's son Dhirajlal. It is undisputed that the three assessees and the members of their family formed one group and the members of another family called the "merchant family" formed another group and between them the two groups held a controlling interest in the aforesaid company.
3. Each of the three assessees, Babubhai, Ratilal and Nagardas, sold a block of shares in the above company to persons directly or indirectly connected with each as follows :
----------------------------------------------------------------------
Date of sale No. of
ordinary To whom sold
shares sold
-----------------------------------------------------------------------
Babubhai 17-8-1959 498 Sons and daughters of Nagardas.
Ratilal 4-9-1959 550 Trustees of Pravinchandra Ratilal
Trust being the trust created by
Kirit
Ratilal Gandhi, Ratilal's sons, for
the benefit of his minor brother,
Pravinchandra Ratilal Gandhi, being
the son of Ratilal.
Nagardas 17-8-1959 498 Wife, daughters and daughter-in-law
of Babubhai.
4. Admittedly the face value of each share was Rs. 100 and the shares were sold to the various persons indicated above at the uniform price of Rs. 125 per share.
5. In the assessment for the year 1960-61 in the case of each of the assessees above a question arose about the taxability of the capital gains, if any, made on the sales of shares as detailed above. Since the transfer of shares was to persons who were directly or indirectly connected with the assessees, the Income-tax Officer took the view that the provisions of the first proviso to section 12B (2) of the Income-tax Act were attracted to the facts of the case. Disregarding the contention urged by the assessees that the value of Rs. 125 placed on the sale price of transfer of each of such shares to the various persons was proper, in view of the fact that in the companies' register of transfer maintained for the period between April, 1959, and December, 1959, share transfer had been effected at the same rate, the Income-tax Officer proceeded to take the intrinsic value of the share as the fair market value of the said shares and by adopting what is known as "break-up-value" method he computed the capital gain on that basis. For the purpose of arriving at the fair market value of the shares he took the view that the balance-sheet of the limited company as on October 31, 1959, which was published on May 24, 1960, afforded better evidence of the value of the shares in preference to the earlier balance-sheet as at October 31, 1958, which had been published on May 2, 1959. He did so for two reasons : first, the dates of sales being August 17, 1959, and September 4, 1959, and, secondly, he felt that the seller in each case was intimately connected with the management of the limited company and as such must have been aware of the financial condition and the improved potentialities of profit making of the company. For these reasons he took the view that the balance-sheet of the limited company and as on October 31, 1959, afforded better evidence of the value of the shares. While computing the value of the shares on the aforesaid basis, certain deductions were claimed by the assessees in arising at the net wealth of the limited company on the basis of which the value of the shares could be worked out and two specific deductions were claimed, one on account of the provision for taxation and the other on account of the provision for proposed dividend shown as a liability in the balance-sheet of the said company. The Income-tax Officer, however, did not permit any of these deductions. Accordingly, he computed the fair market value of the share at Rs. 375 and computed the capital gain on that basis.
6. Appeals were preferred to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner took the view that the balance-sheet of the limited company as on October 31, 1958, which had been published prior to the date of sales alone could be taken into consideration and not the balance-sheet as on October 31, 1959. On the question of deductions claimed by the assessees he took the view that provision for taxation was a liability which any prospective buyer of the shares was bound to take into consideration in paying the price of the shares and, therefore, it had to be deducted in computing the net wealth of the limited company. But, as regards provision for the proposed dividend, he rejected the contention of the assessees. In accordance with his aforesaid view he directed the fair market value of the shares to be computed, which came to Rs. 171.50 each. Of course, the Appellate Assistant commissioner proceeded on the basis that the first proviso to section 12B (2) of the Act was attracted and the method followed by the Income-tax Officer was a correct one. Being aggrieved by the orders passed by the Appellate Assistant Commissioner, each of the assessees went up in second appeal to the Tribunal. The Income-tax Officer too went up in appeal to the Tribunal asking for restoration of his order. The appeals were consolidated and were disposed of by the Tribunal by a common order. On the question of applicability of the proviso to section 12B (2) the Tribunal took the view that the two conditions required to be fulfilled before the Income-tax Officer could have resorted to the proviso had been satisfied in the case. If further confirmed the view of the Income-tax Officer that the balance-sheet of the company as on October 31, 1959, which was nearer the dates of sales in question had to be taken into consideration and afforded better evidence to arrive at the fair market value of the shares in question. On the question of deductions it upheld the Appellate Assistant Commissioner's order that the deductions on account of provision for taxation made by the company was required to be made but the deductions claimed on account of provision for proposed dividend could not be made. In this view of the matter the Tribunal directed that the capital gain could be computed on the basis that the fair market value of the share was Rs. 264.
7. At the instance of the assessees the Tribunal has submitted the statement of the case to this court and has raised four questions mentioned above for our determination.
8. Mr. Kolah, learned counsel for the assessees, has strenuously contended before us that the taking authorities as well as the Tribunal were in error in coming to the conclusion that the first proviso to section 12B (2) was attracted to the cases of each of the assessees. He contended that there were two conditions precedent which were required to be satisfied before this proviso could be invoked by the Income-tax Officer. In the first place, a person who acquires a capital asset from the assessee, whether by sale, exchange, relinquishment or transfer, must be a person with whom the assessee is directly or indirectly connected and, secondly, the Income-tax Officer must have reason to believe that the sale, exchange, relinquishment or transfer was effected with the object of avoidance or reduction of the liability of the assessee under this section, meaning thereby with the object of avoidance or reduction of the liability of tax arising out of capital gains and unless both these conditions were satisfied the Income-tax Officer could not resort to the proviso to section 12B (2). He fairly conceded that in the instant case the first condition could be said to have been satisfied, for, obviously the transferees of the shares in question were directly or indirectly connected with the assessees concerned; for instance, the assessees, Babubhai, had transferred 498 ordinary shares in the company to the sons and daughter of Nagardas; the assessee, Nagardas, had transferred 498 ordinary shares on the same date to the wife, daughters and daughter-in-law of Babubhai; and in the case of transfer of 550 ordinary shares by Ratilal Trust, being the trust created by Kirit Ratilal Gandhi, Ratilal's son, for the benefit of his minor brother, Pravinchandra Ratilal Gandhi, being the son of Ratilal. He, however, contended that so far as the second condition was concerned, it nowhere appeared on record as to whether the Income-tax Officer had reason to believe that the sales of the shares were effected with the object of avoidance or reduction of the liability of the assessees under section 12B of the Act. In this behalf be invited our attention to the manner in which the Income-tax Officer proceeded to apply the proviso to section 12B (2). This is what the Income-tax Officer has observed :
"The assessee's son and Shri Nagardas Ranchhoddas were directors of the limited company during the year of account. It is, therefore, clear that the transfer of the shares is to persons who are directly or indirectly connected with the assessee. Under the circumstances, the provisions of the first proviso to section 12B (2) of the Act are attracted in this case."
9. From the above observations it does appear clear that the Income-tax Officer has undoubtedly stated that the first condition required by the proviso was satisfied by there is no mention whatsoever about the second condition having been satisfied in the case, for throughout the order the Income-tax Officer has nowhere stated that he was satisfied that the transfer of shares was effected with the object of avoiding or reducing the liability of the assessee under section 12B of the Act. Mr. Kolah next referred to the order of the Appellate Assistant Commissioner and pointed out that there was no discussion whatsoever made by the Appellate Assistant Commissioner throughout his order on the question of applicability of the proviso to the facts of the case. It does appear from the order of the Appellate Assistant Commissioner that the entire discussion has proceeded on the assumption that the proviso to section 12B (2) was applicable to the facts of the case and it was on this assumption that the Appellate Assistant Commissioner went on to hold that the relevant balance-sheet to be considered was as on October 31, 1958, and that out of the two deductions claimed by the assessee only one was permissible. When the matter went to the Tribunal, after considering all the other questions that arose for determination and after expressing its view on the other questions one way or the other, the Tribunal took up for consideration the question about the applicability of the proviso to section 12B (2) to the facts of the case and, according to Mr. Kolah, it was because the Tribunal took a particular view on the question as to what should be the fair market value of the shares in question that it proceeded to hold that the transfers must have been effected with the requisite object as required by the second condition prescribed by the proviso. After setting out the relevant proviso to section 12B (2) the Tribunal has proceeded to indicate what the two conditions are that are required to be fulfilled before the Income-tax Officer can resort to this proviso and after setting out those conditions this is what the Tribunal has observed :
"Now, so far as the first condition is concerned, having regard to the facts stated above and which are not in dispute, it can hardly be contended that it is not fulfilled. The seller and the buyer in each case were directly or indirectly connected with the other. It, therefore, only remains to see whether the sale could be said to have been made at less than the full value with the object of avoidance or reduction of the liability. If it can be shown, as has been shown by us above, that the sale was not made for the full value, then it follows as a matter of course that the sale at lesser value must have been made with the object of avoidance or reduction of the liability of the assessee. There can be no other motive for making the sale at less than the full value. In our opinion, in this case the fair market value of the shares sold being much more than the sale price shown, as held by us above, the sale could not be taken to have been made by the assessees at the full value. Therefore, we think the Income-tax Officer was fully justified in resorting to the proviso to section 12B (2) of the Income-tax Act."
10. Mr. Kolah has taken serious exception to the manner in which the Tribunal has disposed of the question of applicability of the proviso to the facts of the case. He contended that the reasoning adopted by the Tribunal for coming to the conclusion that the second condition was fulfilled was that it had been shown in the earlier part of its judgment that the sale was not made for the full market value of the shares and if that was so it followed as matter of course that the sale at lesser value must have been made with the object of avoidance or reduction of the liability of the assessee. This approach was attacked by Mr. Kolah as unwarranted and incorrect. He also contended that the view of the Tribunal that there could be no other motive for making the sale at less than the full value is also open to doubt; for, according to him, the sale of the shares at price less than the full market value could have been effected by the assessees with a view to make a gift of shares to the transferees. In the alternative he pointed out that in a sense the transfers were in the nature of cross transactions and in view of the circuitous way that was adopted to effect those transactions the motive could possibly be to avoid the tax liability under section 16 (3) of the Act and if either of these could be the motive for selling the shares at lesser price than the full market value of the shares, the Tribunal's view that there could be no other motive on the part of the assessee than to avoid his tax liability under section 12B of the Act could not stand. He also contended that having regard to the true scope and nature of the provisions contained in the proviso to section 12B (2) of the Act, unless it is a case of understating the consideration in the document and the actual consideration received has been concealed, the transactions could not be brought within the provisions of section 12B of the Act by resorting to the proviso thereto.
11. On the other hand, Mr. Joshi appearing for the revenue has contended before us that since in this case the first condition required under the proviso was admittedly satisfied, that is to say, since the transfer of shares was to persons with whom the assessee was directly or indirectly connected and since it has been found that the fair market value of the shares in question was very much higher than the one mentioned in the transfer deed, it could be regarded as a case of under-statement and the difference between the sale price mentioned in the transfer deed and the fair market value of the shares as found by the taxing authorities could be brought to tax, the difference having accrued to the assessee as capital gain. In other words, according to Mr. Joshi, it was not necessary that capital gain should have been actually made by the assessee but if it could be said that capital gain should be deemed to have been made by the assessee, even then, the liability under section 12B and the proviso thereto would arise and in support of his contention reliance was placed by Mr. Joshi upon the Supreme Court judgment in Commissioner of Income-tax v. George Henderson & Co. Ltd., where the expression "the full value of the consideration" occurring in the main provision of section 12B (2) has been explained as meaning the price bargained for and the bargained price actually received by the transferor.
12. Having regard to the rival contentions which we have summarised above, it seems to us clear that the answer to the first question that has been referred to us by the Tribunal would depend upon the question as to what is the true scope and nature of the provisions of section 12B (2) and the proviso thereto and before we go to the decided cases on this question, it would be desirable to set out the relevant provision of section 12B, which ran as follows, as it stood at the relevant time :
"12B. Capital gains. - (1) The tax shall be payable by an assessee under the head 'Capital gains' in respect of any profits or gains arising from the sale, exchange, relinquishment or transfer of a capital asset effected after the 31st day of March, 1956, and such profits and gains shall be deemed to be income of the previous year in which the sale, exchange, relinquishment or transfer took place."
13. [We are not concerned with the two provisos to sub-section (1)].
(2) The amount of a capital gain shall be computed after making the following deductions from the full value of the consideration for which the sale, exchange, relinquishment or transfer of the capital asset is made, namely :
(i) expenditure incurred solely in connection with such sale, exchange, relinquishment or transfer;
(ii) the actual cost to the assessee of the capital asset, including any expenditure of a capital nature incurred and borne by him in making any additions or alterations thereto, but excluding any expenditure in respect of which any allowance is admissible under any provision of sections 8, 9, 10 and 12 :
Provided that where a person who acquired a capital asset from the assessee, whether by sale, exchange, relinquishment or transfer is a person with whom the assessee is directly or indirectly connected, and the Income-tax Officer has reason to believe that the sale, exchange, relinquishment or transfer was effected with the object of avoidance or reduction of the liability of the assessee under this section, the full value of the consideration for which the sale, exchange, relinquishment or transfer is made shall, with the prior approval of the Inspecting Assistant Commissioner of Income-tax, be taken to be the fair market value of the capital asset on the date on which the sale, exchange, relinquishment or transfer took place."
14. It will appear clear from the relevant provision of section 12B, which we have quoted above, that the charging provision is to be found in sub-section (1) of section 12B and the incidence of charge is on "any profits or gains arising from the sale....... of a capital asset". In other words, the incidence of charge falls on capital gains actually arising or capital gains actually made by the assessee and under the later part of sub-section (1) such profits or gains are deemed to be income of the previous year in which the sale has taken place. Sub-section (2) and the first proviso thereto are clearly machinery sections which provide for the method of computation of capital gains and these provisions, namely, sub-section (2) and the first proviso thereto, therefore, cannot either control or enlarge the scope of incidence of tax as indicated in sub-section (1) of section 12B. Under sub-section (2), the amount of a capital gain is required to be computed after making certain deductions indicated in clauses (i) and (ii), being expenditure incurred solely in connection with such sale, etc., and the actual cost to the assessee of the capital asset including expenditure of a capital nature incurred for making any additions or alterations thereto. In other words, it is the difference between "the full value of the consideration for which the capital asset has been sold and the actual cost of the capital asset to the assessee that will be taken to be the amount of the capital gain actually earned by the assessee by effecting sake of his capital asset and on such capital gain actually arising to him that the incidence of tax falls on the assessee. All that the first proviso to section 12B of the Act does is to provide for fictional full value of the consideration, for according to that proviso if the two conditions mentioned therein are satisfied, the full value of the consideration for which sale has been effected shall be taken to be the fair market value of the capital asset on the date on which the sale has taken place. In other words, under this proviso, if the conditions mentioned therein are satisfied, the fair market value of the capital asset on the date of transfer is deemed to be "the full value of the consideration" for which the sale has been made. On a plain reading of that proviso it does not appear to us that it makes any provision for levying incidence of tax on fictional or deemed capital gains which ought to have received by the assessee. The incidence being on the capital gains actually received by the assessee, it seems to us clear that the only possible manner in which the a second condition mentioned in the proviso could be satisfied would be by showing that the actual consideration revived by the transferor is higher that the one mentioned in the transfer deed itself. In other words, it must be a case of understating the consideration in the transfer deed and the transferor receiving higher consideration than mentioned in the transfer deed. Looked at from this angle we feel that there is considerable force in the contentions that were urged by Mr. Kolah before us.
15. We shall now refer to some decided cases on the true scope and nature of the relevant provisions contained in section 12B of the Act. The first decision to which our attention has been invited by Mr. Joshi, counsel for the revenue, is the decision of the Supreme Court in the case of Commissioner of Income-tax v. George Henderson and Co. Ltd. On the question as to what would be the proper interpretation of the expression "full value of the consideration for which the sale, exchange or transfer of the capital asset is made" occurring in section 12B (2) of the Act, this is what the court has observed :
"It is manifest that the consideration for the transfer of capital asset is what the transferor receives in lieu of the asset he parts with, namely, money's worth and, therefore, the very asset transferred or parted with cannot be the consideration for the transfer. It follows that the expression 'full consideration' in the main part of section 12B (2) cannot be construed as having a reference to the market value of the asset transferred but the expression only means the full value of the thing received by the transferor in exchange for the capital asset transferred by him. The consideration for the transfer is the thing received by the transferor in exchange for the asset transferred and it is not right to say that the asset transferred and parted with is itself the consideration for the transfer. The main part of section 12B (2) provides that the amount of a capital gain shall be computed after making certain deductions from the 'full value of the consideration for which the sake, exchange or transfer of the capital asset is made'. In case of a sale, the full value of the consideration is the full sale price actually paid. The legislature had to use the words 'full value of the consideration' because it was dealing not merely with sale but with other types of transfer, such as exchange, where the consideration would be other than money. If it is, therefore, held in the present case that the actual price received by the respondent was at the rate of Rs. 136 per share the full value of the consideration must be taken at the rate of Rs. 136 per share. The view that we have expressed as to the interpretation of the main part of section 12B (2) is borne out by the fact that in the first proviso to section 12B (2) the expression 'full value of the consideration' is used in contradistinction with 'fair market value of the capital asset' and there is an express power granted to the Income-tax Officer to 'take the fair market value of the capital asset transferred' as the full value of the consideration' in specified circumstances. It is evident that the legislature itself has made a distinction between the two expressions 'full value of the consideration' and 'fair market value of the capital asset transferred' and it is provided that if certain conditions are satisfied as mentioned in the first proviso to section 12B (2), the market value of the asset transferred, though not equivalent to the full value of the consideration for the transfer, may be deemed to be the full value of the consideration. To give rise to this fiction the two conditions of the first proviso are : (1) that the transferor was directly or indirectly connected with the transferee, and (2) that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under section 12B. If the conditions of this proviso are not satisfied the main part of section 12B (2) applies and the Income-tax Officer must take into account the full value of the consideration for the transfer."
16. The above observations make two aspects very clear. In the first place, the expression "the full value of the consideration" occurring in the main part of section 12B (2) only means the full sale price actually paid to the transferor and the second aspect which becomes clear is that if the conditions of the first proviso are not satisfied, then the main part of section 12B (2) must apply and the Income-tax Officer must take into consideration the full value of the consideration for the transfer, meaning thereby the full price actually paid to the transferor on the basis of which a capital gain could be computed. It is, therefore, clear that in the present case before us if the two conditions mentioned in the first proviso to section 12B (2) are not satisfied or fulfilled, the Income-tax Officer will have no jurisdiction to proceed to take into account the fair market value of the shares concerned but will have to proceed to compute the capital gain on the basis of what was actually received by the transferor in respect of the shares in question.
17. Relying on the interpretation of the expression "the full value of the consideration" occurring in section 12B (2) accorded by the Supreme Court in its decision, Mr. Joshi contended before us that it meant the actual value received by the transferor in this case which was Rs. 125 and it was not necessary that the transferor or the assessee should be shown to have actually received anything higher than the said rate of Rs. 125 and even so, if the fair market value of the shares in question was higher than Rs. 125 per share - Rs. 375 as found by the Income-tax Officer, Rs. 171.50 as found by the Appellate Assistant Commissioner and Rs. 264 as found by the Tribunal - the liability to pay tax on the capital gains would arise for, according to him, having regard to such higher fair market value of the shares found by the taxing authorities, the sale price mentioned in the transfer deed will have to be regarded as having been under-stated. In other words, according to Mr. Joshi, the assessee must be deemed to have made capital gains on the basis of difference between the actual price received by him and the fair market value as found by the taxing authorities. In our view, it is not possible to accept this contention of Mr. Joshi for the simple reason that in the first place the provision of sub-section (2) and the proviso thereto of section 12B are machinery sections and do not deal with the actual incidence of the charge. The incidence of charge is provided by sub- section (1) of section 12B and that incidence, as we have indicated earlier, is on profits or gains actually arising on the sale of capital asset and not on deemed capital gain which should be deemed to have been received by the assessee or the transferor and, secondly, in the situation contemplated by Mr. Joshi it is not understood as to how the second condition of the proviso could be said to have been fulfilled. Before the proviso could be invoked by the Income-tax Officer the second condition that he is required to be satisfied about is that he must have reason to believe that the sale or transfer was effected with the object of avoidance or reduction of the liability of the assessee under this section : in other words, the sale must have been effected with the object of avoiding the liability to pay tax on the capital gains. It is quite possible that though the fair market value of a particular capital asset may be high, the transferor may transfer the capital asset to the transferee who is related directly or indirectly to him for more than one reason and such reasons cannot partake of the object mentioned in the second condition. If the transferee happens to be a close relative of the transferor, the transferor may take a nominal value of the capital asset from the transferee which would normally be very much less than the fair market value, in which event normally an inference could be drawn that he wanted to make a gift of that asset to the transferee. It is also conceivable that the transferor may, with a view to avoid the liability arising under section 16 (3) of the Act, effect such transfer at such rate which would be less than the fair market value of the particular asset. In order that the transfer must be with the object of avoiding or reducing the liability of the assessee under section 12B it must be a case where the consideration mentioned in the deed has been under-stated and actually the transferor has received much more than what is stated in the document. It is only then that the second condition mentioned in the proviso could be said to have been satisfied. For these reasons it is not possible for us to accept Mr. Joshi's contention.
18. The above view which we have taken finds support in a couple of decisions to which we will presently refer. In the case of Killick Nixon and Co. v. Commissioner of Income-tax the Supreme Court, after referring to the provisions of section 12B and particularly the first proviso to section 12B (2), has observed as follows :
"It is open to the Income-tax Officer, if it appears to him, that with the object of avoiding or reducing the liability of the assessee to pay tax, the full value of the consideration for which the sale, exchange or transfer is made is under-stated and the person acquiring the capital asset is a person with whom the assessee is directly or indirectly connected, to determine the fair market value of the capital asset on the date on which the sale, exchange or transfer took place."
19. In other words, the Supreme Court clearly implied that the first proviso to section 12B (2) could be attracted in a case where the full value of the consideration, meaning thereby the value actually received by the transferor, has been under-stated. In other words, it must be a case where the transferor has actually received something much more than what is stated in the transfer deed. In Sundaram Industries Private Ltd. v. Commissioner of Income-tax, on the true scope of the proviso to section 12B (2), the Madras High Court has held that the proviso does not discourage or avoid honest transactions made out of love and affection or for other conceivable reasons on pain of being hauled up for having attempted to avoid or reduce the tax liability and on that basis made liable to tax on the difference between the consideration for the transaction and the fair market value nor does it treat what is not an actual capital gain as a deemed capital gain but it must be limited to escaped capital gain, which is so in truth and in fact, and is not intended to bring about a fictional gain on an assumption and charge the same. This decision makes it very clear that the proviso must be limited to escaped capital gain and such escaped capital gain must be so in truth and in fact and the proviso is not intended to bring to tax any fictional or deemed capital gain.
20. The provisions of section 12B (2) and the scope of the proviso thereto came up for consideration before the Madras High Court in Sivakami Company Private Ltd. v. Commissioner of Income-tax. On the question of burden of proof the court took the view that the burden of proving that certain sales were effected with the object of avoidance or reduction of tax on capital gains would be on the department and that it was not enough if the explanation offered by the assessee was not acceptable or that there was a strong suspicion as to the real motive which prompted the assessee to sell the shares but there must be something positive to suggest that the sales were effected with the object of avoidance or reduction of liability for capital gains. In that case the shares held by the assessee-companies were sold to persons who were directly or indirectly connected with them at prices considerably less than their break-up value. The Tribunal found that the sales were true and genuine, the consideration shown in the accounts was received and there was no under-statement of the consideration. The Tribunal, however, did not accept the explanation of the assessees that the real and main object in effecting these sales was to safeguard the assets of the assessees from being proceeded against by the Government in settlement of or for the recovery of taxes due by the assessees and held that the application of the first proviso to section 12B (2) of the Act was justified. On a reference the High Court held that : (i) in the context in which the first proviso was placed in section 12B of the Act, it was a part of the machinery or computation provisions and as such machinery provision it was intended merely to provide for the method of assessment or collection of the tax and not to increase or vary it; (ii) what was intended to be taxed by the entire provisions in section 12B was the real gain and not a fictional gain and the first proviso to section 12B (2) dealt with cases of avoidance of the tax liability on the gain actually received by under-statement of the consideration payable or paid; and (iii) on the facts found the Tribunal that the sales were true and that the consideration was not under-stated, except for the fact that the explanation offered by the assessee was not acceptable and a strong suspicion existed as to the real motive which prompted the assessee to sell the shares, there was nothing positive to suggest that the sales were effected with the object of avoidance or reduction of liability to tax. Therefore, the conclusion of the Tribunal that the first proviso to section 12B (2) was applicable was not correct. It may be stated that in this case the court accepted with approval the view expressed by a Division Bench of that court in Sundaram Industries Private Ltd.'s case on the scope of the first proviso to section 12B (2). It also relied upon the observations of the Supreme Court in Killick Nixon and Co.'s case which observations we have quoted above.
21. A similar view has been taken by the Kerala High Court in the case of K. P. Varghese v. Income-tax Officer. In that case the court was concerned with the provisions of section 52 of the Income-tax Act, 1961, which are in pari materia with and the same as the provisions of the first proviso to section 12B (2) of the Indian Income-tax Act, 1922. The matter arose in a writ petition, whereby the petitioner-assessee applied for quashing of the notice that had been issued by the Income-tax Officer. The petitioner purchased a property in 1958 for Rs. 16,500 and sold it for the same consideration in December, 1965, to his 5 children and daughter-in-law. The difference between the fair market value and the actual consideration received by the petitioner was treated as gift under section 4 of the Gift-tax Act, 1958, and assessed under that Act. The Income-tax Officer, however, held that section 52 of the Income-tax Act, 1961, also applied to the case and that capital gains had accordingly to be computed on the basis of the fair market value of the asset. The Income-tax Officer proposed to fix the fair market value of the property sold by him on 25th December, 1965, at Rs. 65,000 as against the consideration of Rs. 16,500 for which it was transferred and to assess the difference of Rs. 48,500 as capital gains. The court held that section 52 was intended to operate only in cases of under-statement of consideration dome with a view to dishonestly escape from liability and since that was not the case before it the Income-tax Officer's action was quashed. Mr. Justice Isaac observed as follows :
"In my view that section (section 52) has application only to a case where the consideration in a transfer is under-stated. Sub-section (1) of section 52 deals with a case where the transfer is between persons directly connected and the Income-tax Officer has reason to believe that it was effected with the object of avoiding or reducing the liability of the transfer under section 45. Avoidance or reduction of such liability is possible only by under-stating the consideration. In this context, reference may be made to the decision of the Madras High Court in Sundaram Industries Private Ltd. v. Commissioner of Income-tax."
and the learned judge went on to rely upon the view expressed by the Madras High Court in that case where the Madras High Court, as indicated earlier by us, has taken the view that the proviso was not intended to discourage or avoid honest transactions made out of love and affection or for other conceivable reasons on pain of being hauled up for having attempted to avoid or reduce the tax liability and on that basis made liable to tax on the difference between the consideration for the transaction and the fair market value. The Madras High Court also took the view that the proviso does not treat what is not an actual capital gain as a deemed capital gain.
22. Having regard to the above discussion and the several decisions to which we have referred, we are clearly of the view that in the instant case the second condition which was required to be fulfilled before the first proviso to section 12B (2) could be invoked was not satisfied. Merely because the consideration mentioned in the transfer deed was less than the fair market value of the shares in question and merely because such less consideration was actually received by the transferor, it does not necessarily follow that the only motive for effecting such transfer would be to avoid or reduce the tax liability on the part of the assessee on capital gains. It must be observed that in the instant case it has not even been suggested that it is a case of under-statement of consideration in the transfer deed was received by the transferors; on the other had, since the transfers were between close relations the object could be to make a gift of the shares to the transferees or having regard to the circuitous method adopted for effecting cross-transfers the object could be avoidance of liability under section 16 (3) of the Act. In this view of the matter, the first question that has been referred to us will have to be answered in the negative, in favour of the assessee and we accordingly answer the same.
23. In view of the negative answer which we have given to the first question, it is unnecessary for us to consider the other questions that have been referred to us. The revenue will pay the costs of this reference to the assessees.